Enforcement News: The SEC Giveth and The SEC Taketh Away

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Posted on: Oct 20 2021

The SEC Giveth

In our last article (posted on September 17, 2021 (here)) discussing the SEC’s whistleblower program, we noted that the Commission has paid more than $1 billion in awards to hundreds of whistleblowers since issuing its first award in 2012. In the month that followed, the amount paid to whistleblowers increased by more than $87 million.

The first award of $11.5 million (announced on September 17, 2021, here) was paid to two whistleblowers whose information and assistance contributed to the success of an SEC enforcement action.

One whistleblower received an award of nearly $7 million, while the other whistleblower received more than $4.5 million. The SEC said that the larger award was paid in recognition of the fact that the first whistleblower was the initial source that caused the SEC staff to open an investigation into hard-to-detect violations and thereafter provided substantial assistance. The SEC said that the second whistleblower, by comparison, submitted information after the investigation was already underway and had delayed reporting the information for several years after becoming aware of the wrongdoing.

“This case demonstrates the Commission’s continued commitment to rewarding individuals who provide high-quality tips, and particularly timely ones,” said Emily Pasquinelli, Acting Chief of the SEC’s Office of the Whistleblower.

The second award of $36 million (announced on September 24, 2021 (here)) was paid to a whistleblower whose information and assistance significantly contributed to the success of an SEC enforcement action as well as actions by another federal agency.

According to the SEC, the whistleblower provided crucial information to the staff of the SEC, as well as the staff of another agency, concerning an illegal scheme. Among other things, the whistleblower participated in multiple meetings and identified key documents and witnesses. As noted by the SEC, under the whistleblower program, individuals who provide critical information to other agencies may be eligible for a related action award if they are also eligible for an award in the underlying SEC action.

Commenting on the award, Emily Pasquineslli stated: “Today’s whistleblower brought valuable new information to the attention of the SEC and to another federal agency, greatly assisting ongoing investigations. Whistleblowers can act as a springboard for an investigation or, like here, they can propel forward an already existing investigation.”

The third award of $40 million (announced on October 15, 2021 (here)) was paid to two whistleblowers whose information and assistance contributed to the success of an SEC enforcement action.

The first whistleblower, whose information the SEC said caused the opening of the investigation and exposed difficult-to-detect violations, received an award of approximately $32 million. The first whistleblower also provided substantial assistance to the SEC staff, including identifying witnesses and helping the staff to understand complex fact patterns. The second whistleblower, who, the SEC said, submitted new information during the course of the investigation but waited several years to report the information, received an award of approximately $8 million.

“These whistleblowers reported critical information that aided the Commission’s investigation and provided extensive, ongoing cooperation that helped the Commission to stop the wrongdoing and protect the capital markets,” said Emily Pasquinelli.

Under the whistleblower program, the SEC can pay an award to any individual, or group of individuals, who provide “original information” about a violation of the federal securities laws. Both U.S. citizens and foreign nationals may file whistleblower claims and receive a reward.

To be “original”, the information must be unknown to the SEC and derived from the whistleblower’s independent knowledge or analysis. Whistleblowers who provide “original information” that the SEC uses in furtherance of an enforcement action can recover a reward of between 10% – 30% of the total amount of money collected by the SEC when the monetary sanctions exceed $1 million.

As set forth in the Dodd-Frank Act, the SEC protects the confidentiality of whistleblowers and does not disclose information that could reveal a whistleblower’s identity.

[A full discussion of the SEC Whistleblower Program can be found on the Firm’s website (here) and on the SEC’s website (here).]

The SEC Taketh Away

In the articles that we have written about the whistleblower program, we have highlighted the payment of money to whistleblowers who provided valuable information and assistance to the Commission in the investigation of wrongdoing. As we have noted, individuals who voluntary submit high quality information that leads to the success of an enforcement action may apply for an award in that matter. The SEC encourages whistleblowers to apply for awards only where there is a connection between their tip and the charges in the enforcement action.

Sometimes, however, whistleblowers abuse the system by filing multiple tips with little or no value. When that happens, pursuant to the 2020 amendments to the Whistleblower Program Rules, the SEC can prohibit abusers from receiving an award.

The amendments were adopted on September 23, 2020, and became effective on December 7, 2020. New Exchange Act Rule 21F8(e) authorizes the Commission to permanently bar a claimant from the Whistleblower Program based on submissions or applications that are frivolous or fraudulent, or that otherwise hinder the effective and efficient operation of the Whistleblower Program. The Commission’s Adopting Release (here) defines “frivolous claims” as “those that lack any reasonable or plausible connection to the covered or related action.”

On September 28, 2021, the SEC announced (here) that it permanently barred two individuals from the whistleblower award program, each of whom filed hundreds of frivolous award applications.

According to the SEC, over the years, these individuals submitted award applications to the SEC that bore no relation to the underlying enforcement action for which they were applying. The SEC said that the filing of those applications consumed considerable staff time and resources, hindered the efficient operation of the program, and did not contribute to any successful enforcement action. The individuals were repeatedly warned to stop submitting the abusive filings but refused to do so.

The permanent bar imposed in those matters apply to any pending award application from the individuals at any stage of the review process, as well as to any future award application from the individuals.

Commenting on the permanent bars, Emily Pasquinelli said, “Frivolous award applications hamper our ability to efficiently process awards to meritorious whistleblowers who come forward with helpful information intended to assist law enforcement. Today’s permanent bars send an important message that frivolous award filers will not be tolerated.”